Friday, May 31, 2013

I was looking at my Facebook feed yesterday, and I noticed that a former colleague of mine was kvetching about the current health care system in America. He said that there were too many lengthy and confusing policies, that there is over-administration, and that the current health care system is an overall waste of resources. At least with that, I can agree: the status quo, even with the infamous Obamacare in place, is inadequate. It was his conclusion that I found troubling, which was that in the name of simplicity and efficiency, we need to switch over to a single-payer health care system. In a single-payer health care system, there is a single entity, i.e., the government, that would collect all the health care-related fees and pay out on those health care costs.

My initial reaction was the following: Whether it is the War on Drugs, Social Security, or something as seemingly innocuous as postal services, the government performs so many functions at a sub-standard level, and typically with unintended consequences that exacerbate the situation. Additionally, two major forms of health care spending in this country are currently Medicare and Medicaid, which is to say that the government already has interfered plenty in the health care decisions of the American people. Why would I relinquish the remainder of that control to an entity that already does such a bang-up job? Do I want to trust the government with an individual's personal life-and-death decisions?

Similar to previous blogging, it would be pointless, as well as aprioristic, to say "less government is better" without backing up my argument, so here we go:

A single-payer health care system grants the government a power that is known as, in economic terms, the power of monopsony (also known as the buyer's monopoly). The monopsonist has the power to dictate terms to its own suppliers, which in this case means that the government is able to mandate lower prices to health care providers than would take place in a competitive market. The plus side is that the artificial depression of prices allows for more providable services. However, like with any attempt at price controls, governmental distortions of this sort create unintended consequences. In this instance, the profit margins are diminished, which means that incentive to innovate in the health care market is also diminished. This would also mean that if doctors do not feel like they are being adequately paid, it will disincentivize people from entering the medical field.

Innovation is not the only factor diminished with a single-payer health care system. The overall economic welfare [in comparison to a competitive market] is also diminished. When the government sets the price below the competitive market level, the monopsony creates a price wedge that causes there to be too little of the good to be produced, thereby creating deadweight loss and subsequently reducing economic welfare (see diagram below).

One of the arguments that proponents of the single-payer health care system like to use is that there is no impediment to receiving health care in a timely fashion, and that choice in provider will not be an issue. However, that ends up not being the case. In order to keep costs from exploding, the monopsony has to decrease the quantity in services provided, as is illustrated above. In addition to decreasing the supply, the increased access causes an increase in demand for health care goods and services. As a result, waiting times for health care procedures increase, as can be observed in Canada and the United Kingdom. Such waiting times make it more difficult for patients to receive the required health care when they need it.

Since access to health care increases under the single-payer system, prices increase because this access causes increase in demand (i.e., "free-for-all" system). Another way to say this is that supply and demand are not static, and will thus cause decrease in supply and increase in demand. Proponents would like for us to believe that the administrative simplicity of a single-payer system helps offset costs, or even that the health care is "free." So why is it that even when adjusting for both inflation and population increases, health care costs for Canada (Canada Institute for Health Information, Table A.3.1.1) and the United Kingdom (Her Majesty's [HM] Treasury, Tables 1.4 and 9.11) have increased since their implementation of the single-payer system? Even Taiwan's single-payer system is under financial strain and has to borrow from banks.

It was Lenin who said that "medicine is the keystone of the arch of socialism." The last thing we need to do is diminish the American health care system by injecting further socialism into society and creating further dependency on government because as Cato Institute scholar Michael Tanner illustrates, the grass is not greener on the other side. As we already can observe with Obamacare, the ability to provide universal coverage is an arduous task, much too difficult for the government to pull off. If the government's health care expenditures are increasing over time (CBO, Figure 1.1) to the point where there are $38.6T in unfunded Medicare obligations (Medicare Trustee's Report, Table V.F2), why would I trust the same entity with more control over health care if the parts that the government already controls are being run into the ground? Insurance companies are hardly perfect, but at least if they run short of money to pay claims, they have a greater incentive to reform than the government does. The problem here is not that there is enough government, but that there is already too much governmentinvolved in health care. Is the American health care system imperfect? Yes, it is. Even so, when adjusting raw data to make it more standardized (i.e., something closer to an apples-to-apples comparison), our health care system is comparable to those of other developed countries. If we want to really improve health care in this country, we should treat health care like a good, instead of treating it as a right. Only when health care is treated like a good and opened up to a competitive health care market will we see the improvements in health care that we seek.

August 19, 2014 Addendum: In case you think that longer waiting lines under a single-payer is not a problem, take a look at this Fraser Institute publication.

Wednesday, May 8, 2013

A couple of days ago, the Senate passed the Marketplace Fairness Act (S. 743), which essentially allows for local and state entities to collect sales taxes on the Internet. Whether the Republican-dominated House will pass the bill is another story entirely. In any case, the idea behind the bill is to close the Internet as a tax loophole and provide a tax revenue of an estimated $23.3Bper annum (although that number might be as low as $4B) to help compensate for budgetary shortfalls, which would explain the 69-27 bipartisan vote. Although I am all for minimizing tax exemptions and simplifying the tax code, I have to wonder whether enacting an Internet sales tax in its current legislative form is as sound of an idea as it seems, especially when done in the name of fairness or the government attempting to "level the playing field."

Under existing tax law, the buyer is the one who owes the sales tax. However, due to a Supreme Court ruling (Quill Corp v. Heitkamp [1992]), an individual state cannot compel the collection of taxes of citizens of other states unless the retailer need to have a physical presence in the customer's state. This ruling applies both to traditional retailers and online retailers. Instead, the customer is supposed to submit the sales tax directly to the government (How many people even knew that this was required under law?). It makes sense that state laws should only apply to things that take place within that state. Why force a business to pay a tax to a government in which they have no political voice or representation?

What the Marketplace Fairness Act would do is require online and other remote sellers with annual sales over $1M (so much for factoring in profit margins) to collect the sales tax and send it to the appropriate tax jurisdiction. What this means is that the seller would have to ascertain the purchaser's location, find the appropriate tax rules and regulations for that location's given tax jurisdiction, collect the tax, and submit it to that distant authority.

Under the Marketplace Fairness Act, this level of compliance would only apply to online and remote sellers. No brick-and-mortar establishment would be required to process all of this for its in-store sales, yet online retailers would have to do so for its remote sales? Where is the fairness in that? This will only discourage online retail. Also, given that there are 9,600 sales tax jurisdictions in the United States, can you imagine the compliance costs, as well as the bureaucracy, red tape, and tax audits (Section 2 of the Act) a small or medium-sized business would have to endure? How will driving up the cost of doing business help economic growth? It's not as simple as "simplifying sales tax laws" or using a "streamlined" computer program. Categorizing goods and services across multiple tax codes is anything but simple: just take a look at this example here.

A few other miscellaneous points to consider:

If this is about "protecting small business," why is it that Amazon and Wal-Mart are the most ardent supporters? There is a reason for this: they can handle the burden, whereas the extra burden on their smaller competitors would either cause them to adversely restructure the way they do business or even lay off employees.

Since the bill provides more opportunities for private information being lost, I am worried that the passage of this bill can cause an erosion of privacy. Is anyone worried that the government would be privy to an unprecedented amount of consumer data?

From a customer's standpoint, isn't it possible that shipping costs can offset a sales tax? Shippers have to pay fuel and transportation taxes because of shipping. Also, people don't buy goods online to avoid sales tax. They do so because of price and availability. Many goods online are cheaper, even before sales tax.

Mom-and-Pop stores are not at a disadvantage because of online commerce. If anything, more brick-and-mortar stores have an online presence due to better inventory management and simplification of ordering necessary outputs for final goods.

Rather than strictly focus on revenues, shouldn't states be focused on general budget reduction?

This bill is about forcing out-of-state merchants to act as deputy tax collectors. If a state with high taxes (e.g., California) can collect a sales tax from a state without a sales tax (e.g., Montana), this distorts incentives created by taxation. If a high-tax state refuses to adjust its tax policies, a business or individual can move to another state. However, with this bill, it would give high-tax states the right to impose their bad tax policies extraterritorially. Another way of putting it: instead of competing to lower taxes and attract businesses, states will be competing to to see who can impose the highest level of taxation on citizens in other states.

While there should be tax reform to simplify the collection of sales tax, as well as making sure that Internet transactions have the applications of sales tax as brick-and-mortar businesses by implementing an origin-based sourcing rule, let's not delude ourselves in thinking that the Marketplace Fairness Act is actually about fairness; it's about imposing undue burdens and regulations on small and medium-sized businesses while enlarging government power.

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